04/22/2002 01:47 PM RES

HB 519-NATURAL GAS PIPELINE: SPECIAL PROVISIONS
[Contains comparison to HB 38 during Commissioner Pourchot's
testimony; contains references to SB 360.]
CO-CHAIR MASEK announced that the committee would hear HOUSE
BILL NO. 519, "An Act authorizing priority treatment under the
Right-of-Way Leasing Act for an Alaska North Slope natural gas
project; expanding the scope for the kinds of gas development
projects that may become qualified projects under the Alaska
Stranded Gas Development Act; extending the deadline for
submitting applications under the Alaska Stranded Gas
Development Act; exempting an Alaska North Slope natural gas
project from state property tax and all municipal taxes during
construction; and providing for an effective date." [Before the
committee was CSHB 519(O&G).]
Number 0129
REPRESENTATIVE FATE moved to adopt the proposed committee
substitute (CS), version 22-LS1651\O, Chenoweth, 4/22/02, as a
work draft. There being no objection, Version O was before the
committee.
Number 0178
REPRESENTATIVE PETE KOTT, Alaska State Legislature, presented HB
519 as chairman of the House Rules Standing Committee, sponsor
of the legislation. He began to explain changes in Version O.
[There was discussion by members about packet materials.]
Number 0322
CO-CHAIR MASEK called an at-ease at 2:01 p.m. She called the
meeting back to order at 2:03 p.m.
Number 0369
REPRESENTATIVE KOTT pointed out that the list of changes to HB
519 in committee packets relates to earlier drafts. He then
indicated Section 2 of CSHB 519(O&G) has been deleted in Version
O, as was discussed in the House Special Committee on Oil and
Gas. He offered his belief, from talking to some of the
producers and supporters of the bill, that Section 2 had been
redundant.
REPRESENTATIVE KOTT explained further changes. On page 4, lines
5-8, Version O essentially adopts by reference the Alaska
Stranded Gas Development Act, which gives the commissioner the
opportunity to negotiate the terms with the producers. And on
page 4, line 24, after the word "facilities", the words "to be"
have been added, to clarify that facilities to be exempted from
a general tax are those facilities that will be built, not those
currently built.
REPRESENTATIVE KOTT acknowledged that the latter is a huge
change; he said it wasn't crystal clear in the earlier version,
and that the intent is to make it perfectly clear that the tax
relief is to be provided to those facilities that would be under
construction if this bill were to pass. He suggested the chair
of the House Special Committee on Oil and Gas could confirm that
such an intention was discussed in that committee.
Number 0578
REPRESENTATIVE KOTT highlighted features of HB 519. He
explained that it will "incentivize and bring about some
hardcore discussion" regarding development of a natural gas
pipeline. Noting that a pipeline has been discussed extensively
for years with no results, he suggested this bill is a vehicle
to "take to the table" some future discussions in earnest.
REPRESENTATIVE KOTT emphasized an important feature, that this
bill is tied "somewhat directly" to federal legislation. He
noted that congressional members have asked why they should pass
any incentive or netback provision to the producers if the state
isn't doing so. Furthermore, although a window of opportunity
was wide open ten years ago, he characterized it today as having
an inch left before it closes. Acknowledging some may disagree,
he referenced discussions with others and pointed out that
Alaska is in direct competition with some huge [gas] fields. He
said it is imperative to "step onto the playing field" to get
something going, which HB 519 does.
REPRESENTATIVE KOTT offered that estimates that there will be
natural gas on the North Slope for 50 years are conservative; he
suggested it is closer to perhaps 100 years. Proposing that it
be developed [now], he said, "Otherwise, we may not see another
opportunity in our lifetimes for this field to be developed."
Number 0803
REPRESENTATIVE KOTT explained that the bill grants a tax
exemption from property taxes of municipalities and the state.
The exemption is during the time of construction, which begins
when the commissioner says the qualifications have been met, and
ends the second calendar year after the pipeline has been
constructed. He told members:
It's my understanding, ... talking to some of the
folks, one ... interested party directly, that were
this bill to pass, they would enter into that
negotiation between them and the commissioner, to
bring ... clarity and certainty to the cost of this
project. They're not going to wait a year or so;
they're going to get right in there and start
discussing the mechanics of it. And this is where
your tax-exempt status would be discussed, and what
eventual conditions may be levied.
REPRESENTATIVE KOTT noted that the under the state constitution,
Article IX, Section 4, the legislature can exempt entities from
paying taxes.
Number 0928
REPRESENTATIVE KOTT highlighted other features. Of great
importance, since it sets out conditions for negotiating, is
that the bill extends the life of the Alaska Stranded Gas
Development Act, which has expired, until [2005]. In addition,
it asks that the department expedite the permitting process; he
explained that if a project is worthy and could go forward, the
permitting process should not stall it for several years.
Furthermore, the bill defines a viable project, listing
qualifications, to clarify that in order to qualify for this
tax-exempt period, a company must meet those qualifications [as
determined] by the commissioner. Finally, the bill sets out, in
general provisions, that whoever is responsible for building the
pipeline will use Alaskans, to the maximum extent possible, for
production, development, and building of the needed facilities.
REPRESENTATIVE KOTT told members the foregoing is what the bill
does in very general terms. He concluded:
Again, the big issue is to provide this tax-exempt
status for this period of time. Again, it can ... and
will be negotiated between the producers and the
department on what those conditions may be, based on
the economics of the project. It's important, I
believe, that we provide some incentive to make this
project viable. I think the viability of the project
has certainly been on everybody's plate, and I think
that's a reason why we haven't seen anything go
forward for the last ten years, even though it's been
discussed. We're no closer today, in reality, than we
were ten years ago.
REPRESENTATIVE KOTT indicated other testifiers could provide
technical or historical information.
Number 1230
PAT POURCHOT, Commissioner, Department of Natural Resources
(DNR), testified before the committee, noting that he also
serves as chair of the governor's Natural Gas Cabinet. He said
the administration opposes the provisions of the bill that would
grant a state and local property tax exemption valued at, at
least, $500 million, in the absence of economic information on
project viability and the economic need, and in the absence of a
negotiating framework in which the state might bring forward
other issues of concern to the state.
COMMISSIONER POURCHOT specified, however, that the
administration supports the provisions that would expand and
extend the Alaska Stranded Gas Development Act - passed several
years ago by this legislature - which sets up a framework for
looking at not just property tax, but also a number of issues
with project sponsors; he offered the belief that it provides
the kind of forum whereby there could be negotiated terms that
would benefit and advance a project, as well as protect state
interests.
Number 1343
COMMISSIONER POURCHOT offered some history. Several years ago,
the state commissioned a renowned expert, Pedro van Meurs, to
look at a liquefied natural gas (LNG) route. His [report]
analyzed different tax incentives and what the state might do to
advance the line; it pinpointed property tax as something that
could have a significant [negative] impact, because of its being
a regressive tax at an inopportune time - during construction
and before revenues flow. At the same time, Mr. Meurs
recognized that a property tax exemption might be structured to
be "backloaded" so that exemptions are upfront, with some sort
of repayment later.
COMMISSIONER POURCHOT told members the foregoing was very much
part of the discussion when the Alaska Stranded Gas Development
Act was passed. He said it was always assumed it would be the
kind of topic one might negotiate, in addition to other issues,
and then bring back to the legislature. He noted that unlike HB
519, that Act also includes a provision to formally involve the
input of municipalities, particularly those impacted by the
property taxes. He explained, "In the stranded gas Act, it was
felt that a formalized process of them being able to comment and
participate ... in elements of the negotiations would be
appropriate."
Number 1469
COMMISSIONER POURCHOT recalled that when the administration had
brought forward so-called marginal field legislation and
Northstar legislation in previous years, the legislature was
very much interested in looking at economic assumptions
regarding the basis on which tax or royalty structures might be
changed. A lot of law was written into both those bills
governing what the administration should be looking at, he said,
and on what basis it should be making conclusions; a lot related
to getting economic information on project viability and
weighing alternative tax consequences before giving a specific
kind of royalty or tax benefit. He concluded:
That would be the same type of arena that we would be
looking for in this regard, and probably a better way
of structuring both benefits and incentives that can
advance a project, as well as protect state interests,
and put forward some of the things that the state may
be interested in, also, in bringing forth in such
negotiations.
Number 1532
CO-CHAIR SCALZI asked whether Commissioner Pourchot was
discussing Version O.
COMMISSIONER POURCHOT noted that he'd just now seen it and had
listened to Representative Kott describe the changes. He said,
"I believe my testimony would still be appropriate for the CS in
front of you."
Number 1550
CO-CHAIR SCALZI characterized Representative Kott's description
as a deferment of taxes, rather than an exemption, which Co-
Chair Scalzi indicated is his own understanding as well. He
asked, "If that's the case, does the administration support the
deferment?"
COMMISSIONER POURCHOT offered his understanding from
Representative Kott's testimony that there would be an
opportunity to negotiate some sort of recoupment, payback, or
deferral. He said, however:
I think that's in theory true, but it certainly defies
any type of negotiation that I've been involved in, in
the sense that there are two separate things in this
bill. ... On the one hand, the bill asks that ...
during construction and the following two years of
operation, all of that activity would be exempt from
both ... state and local property taxes. On the other
hand, in the other provisions, the stranded gas Act is
extended and expanded to include ... all types of gas
projects, not just LNG. This is very similar, by the
way, to House Bill 38 before the committee that the
governor introduced last year.
It is not inconceivable, but it is a stretch that if
you are legislatively given a benefit of no property
taxation, then to turn and do a negotiation, to ask
the administration to then negotiate back for
something that you've already given away in statute --
... if they're even interested in negotiating on
something they already have, you're going to have to
give something. So, you're already at a ... lot of a
disadvantage in that type of negotiation, because
there are other things that project sponsors would
like to see, that they've testified [about] before:
the valuation of gas, how the state treats its
royalty[-in-kind] gas versus in-value gas, ...
severance tax, royalty rates. So, you have opened a
lot of new fronts, if you think you're going to go
back and then negotiate recoupment or repayment of ...
a benefit that you've already legislated.
Number 1696
CO-CHAIR SCALZI said he also interprets Version O to say the
commissioner, rather than the legislature, will do the
negotiations on any deferred taxes. "I haven't picked up on the
part where we're at, in this," he added. He asked, "Do you have
any qualms about the legislative body being the one that has the
final say on this?"
COMMISSIONER POURCHOT answered that it was a "very large issue"
several years ago, relating to the bills he'd referenced
earlier; at that time the administration, like prior
administrations, felt that kind of activity was the province of
the executive branch. It was an act of comity, "according to
our lawyers," he said, of bringing the negotiated deal back to
the legislature for final approval, as happened with Northstar.
He said that is still anticipated in the Alaska Stranded Gas
Development Act. Commissioner Pourchot added, "By the way, the
commissioner in that regard, I believe, is the commissioner of
revenue. ... We would want to assist him ... if he got to
royalties." He concluded, "So, I guess the difference is final
approval versus actual negotiation."
Number 1792
REPRESENTATIVE FATE followed up on Co-Chair Scalzi's questions.
He said the three references to the Alaska Stranded Gas
Development Act make quite clear the commissioner's role in that
negotiation. He also offered his belief that in this
legislation the interests of the affected municipalities are to
be taken into consideration during the negotiation period. He
said he'd felt certain in the hearing in the House Special
Committee on Oil and Gas [which he'd chaired] "that we had met
those objectives, both for the municipality and for the ability
of the commissioner of revenue to make those negotiations
meaningful for both the state and the municipality, but with the
... assent, of course, of the ... people involved in the
project." He concluded that it is "somewhat a reopening of that
stranded gas Act" in regard to the tax regime.
CO-CHAIR MASEK asked whether there were further questions and
then thanked Commissioner Pourchot for his testimony.
Number 1888
LARRY PERSILY, Deputy Commissioner, Office of the Commissioner,
Department of Revenue (DOR), testified on HB 519, indicating his
testimony would be similar to Commissioner Pourchot's. He
advised members that the DOR has objections to the bill as it
relates to not only state and municipal property tax, but also
to sales tax. He said the bill "gives it away for six or seven
years, and then tells the Department of Revenue, under the
stranded gas Act, to go negotiate the best deal we can."
MR. PERSILY informed members he has been a negotiator before,
and there must be something to negotiate with. By giving a
total waiver of property and sales tax during construction and
for the first two full years of production, the bill would - to
his belief - make it impossible to negotiate property and sales
tax. "We could, under the stranded gas Act, continue to
negotiate a contract for payments in lieu of taxes for
production tax," he noted. "None of that would involve the
municipalities. The municipalities would see their revenues
affected by property tax and sales tax."
MR. PERSILY referred to the definition of what would be covered
under the tax waiver. He expressed concern that it is still
ambiguous and that the phrase "and related facilities" could
present problems. For example, would it include the need to
expand a saltwater treatment plant at Prudhoe Bay as part of a
project, well conversions from oil to gas, or separation
facilities? Would they be eligible for the property tax waiver
or not? He explained:
Oil companies are like everyone else. You look at
your tax form and you try to find as many ways as you
can - within the law, within reason - to minimize your
taxes. It's American. I guess it's good business.
And it's probably the way it should be. We feel that
the "and related facilities" would present problems
that would end up in disputes between the state and
whoever is doing the developing of those new
facilities that would need to be constructed for a
natural gas project.
Number 2039
MR. PERSILY informed members that he'd provided an updated
spreadsheet [dated April 22, 2002] showing estimated property
tax losses. He brought attention to the assumptions on the top
of the first page, which read:
4.5 bcf/d
$21.3 billion project to Chicago
$3.0 billion conditioning
$17 billion pipeline
30% of pipeline in Alaska
All of conditioning plant on North Slope
22% of Alaska pipeline on North Slope
12% of Alaska pipeline in Fairbanks North Star Borough
18.5 mill rate on North Slope
15.5 mill rate in Fairbanks
Production starts in Year 6
MR. PERSILY explained that Year 1 would be when the decision
would be made to go ahead and start applying; in Year 2, there
would be mobilization, so there would be property tax due on
equipment arriving in Alaska. Production would start in Year 6,
and property tax would be waived for two full years of
production. "You'd be looking at waiving three-quarters of a
billion dollars or so in property tax revenues to the state, to
the Fairbanks North Star Borough, and to the North Slope
Borough," he pointed out.
MR. PERSILY turned attention to the second page of the
spreadsheet, which shows property tax waivers if HB 519 were
interpreted to include Point Thomson. He explained:
The reason we raised that is, Point Thomson is very
heavy in gas - 9 tcf [trillion cubic feet]. So if I
were a producer, and if I wanted to argue, for
example, that I'm developing Point Thomson because of
the gas line - and without a gas line, I'm not
developing Point Thomson - would I try to put that
under the waiver of [HB] 519? It's just something we
wanted to raise.
MR. PERSILY offered to answer questions.
Number 2114
REPRESENTATIVE FATE surmised that Mr. Persily hadn't considered
the words "to be" inserted in Version O, but instead had used
"and related facilities constructed". He also asked what
scenario Mr. Persily had used for the computations, and whether
it involved negotiation or having all the taxes be exempt.
MR. PERSILY answered, "Under the legislation, the way we read
it, property taxes on the project and related facilities are
exempt, period. And then we can negotiate."
REPRESENTATIVE FATE asked whether the computations were made,
then, on the basis that there would be no negotiations for
mitigating impacts to the municipalities.
MR. PERSILY affirmed that.
Number 2183
CO-CHAIR SCALZI said he hadn't seen Version O until just a few
minutes ago, either, and had prepared amendments similar to what
the proposed CS does, "in that it defers payments." He added,
"The amendments were to defer them to a time certain, and then
specifically say how the paybacks would come forth." He asked
Mr. Persily whether conceptually it would give the Department of
Revenue more comfort - and "more of a leg to stand on" because
there would be a deferral to a time certain - if it were
specified that there would be a payback but also that
negotiations would take place in the future.
MR. PERSILY said that was the original intent of the Alaska
Stranded Gas Development Act in 1998, to sit down and see what
is needed to help make the project economical, to see how the
state can contribute to that, and to defer payments until later.
During construction and the early years of a project this size,
property tax is a heavy burden because there is no positive cash
flow but a lot of taxes. He added:
But perhaps the state could negotiate a contract for
payment in lieu of taxes, to bring back to the
legislature for approval; ... maybe it would waive
some of them, but it would defer some of the rest of
the payments to a time where there's positive cash
flow. Particularly in times of high prices, the state
could increase its take.
Number 2271
CO-CHAIR SCALZI asked whether, if it were specifically spelled
out in the proposed CS, Mr. Persily would feel there is that
negotiating leverage which he believes is lacking now.
MR. PERSILY replied:
Without seeing the exact language, ... that is the
intent. If it ... gave us the ability to negotiate
deferral, waiver, reduction - some structure, rather
than giving away the tax and then telling us to
negotiate with nothing - sure. I think we could get a
good deal for the state and for the developers of this
project.
Number 2309
REPRESENTATIVE GREEN asked:
If we deferred this half billion or six hundred
million dollars of taxes until later and then recouped
most or all of that in a later portion of the project,
when there was a positive cash flow, they would act as
a deterrent or negative as far as the netback for the
wellhead value that the state would base its royalty
on?
MR. PERSILY answered, "If I understand the question, when they
pay tax, that reduces the netback."
REPRESENTATIVE GREEN said, "So, when they pay this tax on top of
the other, then that has a further dampening effect on the
netback during those years of payback."
MR. PERSILY replied, "I believe it would, but that might be
something we could negotiate."
CO-CHAIR MASEK asked whether there were further questions and
then thanked Mr. Persily for his testimony.
Number 2406
PAMELA LaBOLLE, President, Alaska State Chamber of Commerce,
came forward to urge passage of HB 519. She said Alaska
absolutely needs a gas pipeline. She expressed concern that
sometimes people outside Alaska seem to have a large say over
what happens in the state. With the defeat [in the U.S. Senate
of the opening of the Arctic National Wildlife Refuge to
development] last week, and with no other large development on
the horizon to spur economic growth, she said, members are
concerned about the state's economic future.
MS. LaBOLLE told the committee that while the final results of
the producers' study haven't been released yet, it should be
apparent this is a project of enormous cost and risk. She
suggested the state and local governments would benefit greatly,
for years to come, if the producers were encouraged to take the
inherent risks and develop the North Slope gas resources. She
continued:
The temporary tax exemption provided by this bill
should be looked upon as an investment by the state
and municipalities to encourage the producers to go
forward with a project that will create jobs, benefit
municipalities, spur economic opportunity for
business, and start a whole new industry, a gas
industry for Alaska.
By revitalizing the Alaska Stranded Gas Development
Act and having it apply to this project, the state and
producers can create a contract that will assure tax
clarity and certainty, and protect vital interests of
the state and affected municipalities.
How often does the state have an opportunity to take
such a bold step to encourage large-scale economic
growth? Several states and cities around our nation
have offered, to businesses, tax incentives to
encourage them to invest. The state should be less
concerned with perhaps giving away too much, and more
concerned with not missing a significant opportunity
for economic growth, perhaps the only one in the next
few decades. Thank you.
Number 2527
REPRESENTATIVE VIC KOHRING, Alaska State Legislature, concurred
with Ms. LaBolle's testimony. He said on one hand, Alaska would
be giving up potential state and municipal revenues, but there
would be a substantial benefit from construction and operation
of the gas pipeline, in terms of investment in communities,
jobs, and so forth. He offered his opinion that the tax
exemptions in the bill should be retained for that reason.
Number 2575
REPRESENTATIVE GREEN asked Ms. LaBolle whether she had any idea
what the returns to the state would be.
MS. LaBOLLE said no, but that she imagines them to be very
significant - billions of dollars.
REPRESENTATIVE GREEN asked, "What would you say if it were
significantly less than that?"
MS. LaBOLLE answered, "We need income resources. You're ...
looking for every million dollars you can find in the budget
right now. Why would we quibble whether it be millions or
billions, when, in fact, anything is going to be a great
advantage for the state?"
REPRESENTATIVE GREEN asked whether it wouldn't be to her
advantage, however, as a citizen and member of the state
chamber, to have the state be able to negotiate from a stronger
position, to get a higher amount.
MS. LaBOLLE said she believed it would be.
Number 2655
REPRESENTATIVE McGUIRE suggested Ms. LaBolle probably isn't in a
position to know all the "numbers" for the bills she supports,
but that her position is more to support economic development in
general. She stated her understanding, from talking to Ms.
LaBolle and members of the state chamber, that they see this as
an opportunity for growth in Alaska, including economic
development and jobs.
CO-CHAIR MASEK thanked Ms. LaBolle for her testimony.
Number 2696
KEN THOMPSON testified via teleconference, saying he would
comment as a citizen and share some natural gas industry
experience on some elements of this bill. He told members he
believes the elements of [HB 519] that extend the Alaska
Stranded Gas Development Act are positive; that [Act] is helpful
for resources like this, he said, and those particular
provisions should be extended.
MR. THOMPSON commented with regard to the exemption of ad
valorem or property taxes. He recalled that several years ago,
as an oil-and-gas industry executive, he'd personally felt that
to some degree the ad valorem tax during the period of
construction of the pipeline was unfair; at that point, a
company has billions of dollars at stake that it has laid out
and financed, and yet has an asset it cannot use until
completion. Then and now, therefore, he favors some deferral of
ad valorem taxes until cash flow starts on the gas pipeline. He
said he believes that aspect of the bill is positive.
Number 2777
MR. THOMPSON suggested changes to consider. First, the ad
valorem tax should start again when gas is shipped. He said he
simply doesn't understand why there should be an exemption for a
couple of years after the startup of cash flow. He remarked,
"As an Alaskan, I can understand some unfairness in receiving
taxes on an asset that's not in use. But once it goes into use
and gas starts flowing, there should be a tax." He noted that
the provision he was talking about was on page 6, lines 20-22,
in the bill version he had.
MR. THOMPSON offered a second change: narrowing the definition
of the gas project. He suggested the exemption should apply
specifically to the gas pipeline and select components of the
natural gas processing plant that is getting the gas ready to
ship. For example, there should be some deferral or waiver when
removing the carbon dioxide to get the gas ready to ship down
the pipeline.
MR. THOMPSON pointed out, however, that some of that plant will
be used, for example, to return carbon dioxide to the field for
enhanced oil recovery. He added, "That should make a lot of
money, so I don't think it should have a property tax
exemption." He therefore suggested [the exemption] should be
"downstream of the natural gas processing plant." He explained
that the current language could be interpreted by certain
producers as even trying to exempt part of the Point Thomson
project, a stand-alone development project that he said is not
the gas pipeline or processing plant.
Number 2887
MR. THOMPSON offered a third suggestion: taking this great
benefit off the table if the companies do not commit to a
pipeline project by either December 31, 2003, or June 30, 2004.
He noted the 2005 extension date at the end of the bill. He
explained that it has been 25 years since the startup of Prudhoe
Bay [oil] production, and yet still there is no gas marketing
from there. "I think the time has already passed," he remarked.
He suggested executives and managers should be going to their
chief executive officers and boards with a clear message that
the State of Alaska has run out of patience. "It's time to
commit to a project now," he said. "These companies are doing
projects overseas, where they're running into lease terms,
penalty payments, other circumstances and consequences." He
further said:
I like the positives of this, of giving something that
makes the economics better, but pull it off the table
quickly. Make them show economics, that unless they
commit to a project by the end of 2003, ... these
economic benefits are removed; they're off the table.
If you extend it 'til June 2005, you won't get an
answer 'til June 2005 - and you'll probably in that
legislative session in 2005 be asked for an extension.
I would, ... in the negotiations, make it very firm.
I guess I could live with June 30, 2004, but I would
not extend it. These pipeline companies and the
producing companies have completed study after study.
It's been 25 years. It's time to get on with it.
[Not on tape because of the tape change, but recorded in the
committee secretary's log notes, is Mr. Thompson's comment that
he interprets this bill as an exemption, not a deferral.]
TAPE 02-34, SIDE B
Number 2984
MR. THOMPSON asked the committee to think about whether an
"economic test" should be done. Pointing out that the bill
grants $500 million to $750 million in benefits, he said these
companies keep issuing press releases that this [proposed
pipeline] isn't economically feasible. He remarked:
I don't see where they'd object at all to showing
testimony that, indeed, it is not economic. I don't
think that any of them would be opposed to showing
their economic data ... if they're making these press
statements. And then the state could rest assured
that the giving of a gift of $500 million to $750
million truly was justifiable. ...
Having said that, I do believe this is the kind of
incentive that is necessary to move this forward, and
certainly would support this bill if these changes
that I've suggested were made. And I think it could
be helpful to the state, and would give a good,
economic benefit that's justifiable to pipeline
companies and to the producers. In fact, that's
another reason I like this bill, is this could benefit
pipeline companies as well, and those types of
investors, and not just producers.
Number 2902
REPRESENTATIVE GREEN, noting that June 30, 2004, would be after
the legislative session, asked whether perhaps April 1 would be
a better date for an extension to 2004.
MR. THOMPSON said that is a great point. He added:
I actually believe in December 31, 2003; I'm pretty
firm on that. But ... different people have told me
that's not fair, so I don't mind a few more months.
But to extend it two or three more years -- I mean,
it's been 25 years. Enough is enough, as far as I'm
concerned. And so that April would be a timeframe,
certainly, with the legislature still in session ...
for further debate on this.
Number 2854
REPRESENTATIVE KERTTULA asked Mr. Thompson to elaborate about
his proposed change from "related activities" to "the select
components of the plant". She requested that he describe
exactly what he would allow. She noted that the committee had
just received [Version O] and therefore she didn't know exactly
where it would go.
MR. THOMPSON answered:
This is an example of what Commissioner Pourchot was
describing, that there needs to be a negotiation. And
I think that that would be something between the
commissioners and the pipeline investors to clarify.
But let me give you an example. In the natural gas
policy council hearing last September, in the producer
testimony, as far as a project ... they showed an 11
percent rate of return after taxes, assuming a $3-per-
mcf [million cubic feet] gas price in the cost
estimates at that time. And their definition of a
project ... included some capital investment at Point
Thomson as well as a pipeline from Point Thomson. And
I disagree with that. That is a stand-alone
development project. I believe it is one Exxon should
move forward with. If they choose not to, perhaps
take the leases back and I'll certainly consider
forming a company to develop that field. ... I think
it'd make some good money. It should not be included.
I think what should be included is the gas project
itself, which is the gas processing ... and then
downstream, meaning the pipeline. The gas processing
plant is very complex. There are many components of
that gas processing plant that truly [are]
conditioning the gas to be acceptable in quality for
the pipeline. And I think those types [of] components
should have this waiver of the ad valorem tax for that
length of time.
There are other pieces, in module components that will
be plugged in, that are not associated directly with
the conditioning of gas down the pipeline, but some
ancillary businesses. In fact, some components may
help the enhanced oil recovery; those should be ...
excluded from the exemption of the property tax. And
if, for some reason, these companies feel they need
help on that, that's a separate subject that should be
a separate bill or separate hearings or what-have-you.
But be very careful what this covers. ... I think it
should cover, traditionally, getting the gas
conditioned for market, into the pipeline, and the
pipeline only - and nothing earlier than that.
CO-CHAIR MASEK thanked Mr. Thompson for his testimony.
Number 2689
BILL ALLEN, Chairman and Chief Executive Office (CEO), VECO
Corporation, came forward to testify in support of HB 519. The
following testimony was read on Mr. Allen's behalf by Rick
Smith, Vice President of VECO Corporation:
Madam Chairman and members of the committee, it is a
pleasure to be here with you today, and I appreciate
the opportunity to speak with you on an issue of
utmost importance to Alaska. In fact, I cannot think
of a single more important issue at this time in
Alaska's history. As Alaskans, we have truly been
blessed with a rich and vibrant heritage. Our land is
rich in natural resources and unmatched in natural
beauty. Our modern history [was] shaped by the
sacrifice and vision of courageous pioneers who saw
Alaska's potential and worked hard to make it a
reality.
Alaska achieved statehood only after a prolonged fight
where Alaskans put aside their differences and worked
together toward that single goal. We got the trans-
Alaska pipeline, but only by a single vote. And the
recognition of the rights of Native Alaskans barely
made it through Congress - and again, only after a
determined and difficult fight. In each case,
Alaskans had to stand united against outside interests
and fight tooth-and-nail for the right to control our
own destiny.
Number 2532
What's relevant here is that the outcome of each of
those monumental efforts dramatically shaped the
Alaska we all enjoy today. Without the oil pipeline,
there would be no permanent fund, and our current
budget dilemma would be much worse. Without ANILCA
[Alaska National Interest Lands Conservation Act],
Native Alaskans would have less ability to shape their
own destinies.
My point is that we have all reaped benefits from
those visionary acts by Alaska's pioneers. I came
here in 1968 and started VECO in 1969. I worked hard
and watched VECO grow from a small company servicing
the Kenai oil patch to an international corporation
employing more than 4,000 people. We grew with Alaska
and benefited tremendously from Alaska's vibrant, oil-
driven economy.
Number 2488
MR. ALLEN'S testimony continued:
I would love to say that VECO's success was merely of
my own doing. But the truth is, I was in the right
place, at the right time, with the right product. And
I often wonder where I would be today if I had not
taken that chance and started VECO way back then. I
had a good-paying job welding pipe, a secure income -
at least for that time. But I knew that with the
discoveries at Prudhoe Bay, ... Alaska was going to
change and [was] on the verge of something big. So I
took that calculated risk, gave up my job, and
invested in my future. The rest, as they say, is
history.
Today, I'm here before you because I can't help but
see some important parallels. Change is once again on
Alaska's horizon. But unlike 1969, this time it's
unclear what direction ... that change will take.
Alaska is truly at a crossroads. Many of our
traditional industries are struggling - often through
no fault of their own. And as those traditional,
mainstay ... Alaskan industries struggle, Alaska
struggles, and Alaskans find themselves out of work
and unable to provide for their families.
Number 2415
In addition, as our state's economy shrinks, so does
your ability to ensure better schools, better
communities, and a better quality of life for all
Alaskans. Alaska desperately needs the gas pipeline
and the jobs, revenues, and economic growth it will
bring. Nothing else holds such great potential for
Alaska's future.
The North Slope has enough proven reserves of natural
gas to fill a pipeline for the next 50 years, and
that's just the known reserves. Estimates suggest
there may be enough gas to keep the pipeline - and the
jobs and revenues it will create - operating for the
next 100 years. Unfortunately, before Alaska can
realize any of those benefits, we must build a
pipeline.
Number 2363
MR. ALLEN'S testimony continued:
A few years ago, like most Alaskans, I was
enthusiastic about the prospects for the gas line.
With prices soaring, construction seemed imminent.
Well, just as quickly, prices dropped and the
economics changed. It's now clear that without some
incentives, private industry is not going to be
willing to risk the billions of dollars necessary to
construct the gas line at this time. The project
simply does not "math out" unless some of the
construction and startup risks are offset.
To that end, for the past several months members of
our congressional delegation have worked hard to enact
federal incentives to help make the gas line a
reality. But as with any Alaska resource development
issue, they are fighting a difficult, uphill fight,
and they need our help. Opponents of the gas line are
now pointing out the absence ... of state action on
the issue - and using that point to try to defeat our
delegation's effort in D.C. "If Alaska does not care
enough to offered incentives," they say, "why should
we?"
Our delegation has indicated that passage of HB 519
will send a clear signal to Washington and the
producing companies that Alaska is ready to step up to
the plate and invest, along with them, in Alaska's
future. Senior officials from the production
companies have indicated a willingness to proceed, if
federal and state legislation is passed to help offset
some of the project's tremendous risk. They also seek
reasonable assurances of stability in Alaska's tax and
economic [climate].
If you think about it, such requests are not
unreasonable when you consider the producers would be
risking up to $20 billion at a time when prices are
unstable. But please, make no mistake - I'm not here
to speak for the producers; they didn't ask me to do
this.
Number 2254
MR. ALLEN'S testimony continued:
I'm here as an Alaskan, an Alaskan with some
expertise, but first and foremost, an Alaskan who has
fought alongside you for local hire, jobs, and a
brighter future. This project clearly offers that
potential.
Some have asked what this legislation will cost. My
answer is simple: absolutely nothing, because without
this legislation, the gas line will likely never be
built. And you can't tax something that doesn't
exist, so any taxes potentially deferred by this
legislation would never have been realized anyway.
On the other hand, the true cost lies in doing
nothing. If this legislation doesn't pass and the gas
line isn't built, what will that cost Alaska? The gas
line would create thousands of new jobs and billions
in new revenue and economic activity. It would foster
a whole new gas industry, an industry we currently do
not have, and help provide Alaska with economic
stability for at least the next 60 years.
Number 2181
But we know that Alaska isn't the only place in the
world where natural gas exists. And as with our other
resource industries, international competition
increases every year. So the choice is really up to
us. We can reach out and seize this opportunity while
it still exists, or hold out and hope for something
better. But I've never been much for waiting and
hoping.
I believe Alaska is at the right place, at the right
time, with the right product. And our state's destiny
truly hangs in the balance. A window of opportunity
is still open - if we act now to help make this
project a reality. But I strongly suspect that if
that window shuts, it may never open again.
Like the great Alaskan leaders before you, I encourage
you now to stand united and act quickly on behalf of
all Alaskans and future generations to make this dream
a reality.
Number 2104
CO-CHAIR SCALZI mentioned testimony by the Department of Natural
Resources and the Department of Revenue that the state would be
in a stronger position to negotiate if the taxes were deferred
to a time certain and then were under consideration for an
exemption for a later date. He asked Mr. Allen whether he would
have any problem with using that methodology, rather than what
is in Version O.
MR. ALLEN answered that if there is to be an incentive, it
should be given now. He referred to HB 393 [which had become
the Alaska Stranded Gas Development Act] and said, "You've got
all you need to ... negotiate." He suggested the municipalities
would need some help with workers, for example, and said, "They
tell me ... the bill will do that, help those guys." He
concluded, "If we're going to give them an incentive, ... let's
do it; if we're not, let's don't."
Number 1990
REPRESENTATIVE FATE noted that Russia is "coming online," has
huge reserves, and isn't a member of OPEC [Organization of
Petroleum Exporting Countries]. He suggested Russia may even be
a competitor of OPEC, which might drive the price of gas and oil
down, negating this project or any other in Alaska. He asked
Mr. Allen to elaborate on why Alaska might not get a pipeline if
it isn't constructed in the near future.
MR. ALLEN replied that there is a market in the Lower 48 that
the producers want to go to; he indicated his belief that if the
state acts now, [the producers] will also, if there is federal
legislation as well. He agreed there is a lot of competition,
including Russia, which has a lot of gas and oil. He said
Alaska has competition all over the world, and mentioned the
need for an incentive; he also mentioned the Gulf of Mexico and
Africa. He suggested if the companies start putting capital in
other places, they won't come back [to Alaska] for a long time.
Number 1810
REPRESENTATIVE GREEN noted that it might take six to ten years
to build the line and have it operating. He pointed out areas
mentioned by Mr. Allen that are on the water, as is Sakhalin
Island; some may not require a pipeline and thus could be
brought online within two or three years after an Alaskan
project is begun. He suggested it must be a significant concern
to investors in the companies now. Noting that Alaska's may be
a 50- to 100-year project, he asked, "Do you think that acting
this week instead of maybe next week, or even a year from now,
truly will make a difference as far as this project is
concerned?" He again expressed concern about the rapidity with
which a tidewater project elsewhere could come online ahead of
the Alaskan project.
MR. ALLEN mentioned the market in the Lower 48, "somewhere
around Chicago," and indicated his belief that unless it is LNG,
[other production areas] can't compete with Alaska there. He
said once the producers start rolling the pipe and are really
committed, they'll go ahead. He noted that there will be some
time period of study, permitting, and engineering. He remarked,
"They told me that ... if we get the [legislation] in D.C. and
if we do this, ... they're going to start." He mentioned $300
million or so. He said, "They're already committed when they
start doing that. They will start this as quick as they can
because they want that market in the Lower 48, just like we do."
Number 1615
REPRESENTATIVE KOHRING thanked VECO Corporation for its
contributions to the economy; he mentioned hiring Alaskans who
are qualified, as well as dollars invested. He agreed regarding
the window of opportunity and said if there is an opportunity
now, even if a small one, it should be seized and acted upon.
He offered that HB 519 is a good vehicle.
CO-CHAIR MASEK asked whether there were further questions and
then thanked Mr. Allen.
CO-CHAIR MASEK called an at-ease at 3:15 p.m. She called the
meeting back to order at 3:16 p.m.
Number 1499
JOE MARUSHACK, Vice President, ANS Gas Commercialization,
Phillips Alaska, Inc., testified in support of HB 519 as
follows:
There are two things that this legislation does. One
thing the proposed legislation does is revive the
Stranded Gas Development Act process passed by the
legislature in ... '98. The reason we believe you
should consider this process is that it's a good one.
It was a long-negotiated, well-thought-out, thoroughly
debated process that provided the opportunity for the
kind of fiscal clarity and certainty we believe is
essential to move a gas project forward. It provides
for public notice and comment; municipal involvement;
and, ultimately, legislative approval of any agreement
between the state and the project's sponsors.
The second thing the proposed legislation does is
provide a property tax abatement during the
construction period and two years of operation
afterwards. The reason we recommend you consider this
aspect of the bill is that it sends a signal to the
U.S. Congress, currently considering national energy
legislation. It signals that the State of Alaska has
some skin in the game.
Number 1417
MR. MARUSHACK continued:
For the past several months, most of Phillips' gas
emphasis has been directed at the federal level to
achieve congressional legislation changes to advance
the project. These include, first, new federal
legislation that creates permitting certainty and is
part of the [U.S.] Senate energy bill; second, a
federal mechanism ... that would help mitigate the
unacceptable market risk of [a] project of this
magnitude, [and] which provides downside mitigation to
the project. This piece of legislation is, in
Phillips' view, a most critical element in moving the
project forward. It shares the benefits the Lower 48
consumers will see from the ANS gas coming to the
market, while addressing risk inherent in such a large
and costly project.
While addressing those needs in D.C., we are
continually asked, "What is Alaska doing to
proactively progress the project?" This bill would
send a positive response to D.C.
Much of the debate about the property tax portion of
the bill seems to have centered around, "How do we
know when it's needed?" or how we can recoup the
foregone revenues if [the] project turns out to have
better-than-expected economics.
Number 1350
MR. MARUSHACK continued:
Let me state clearly: There is no circumstance where
the property tax abatement proposed in this bill would
make the single difference in the project economics.
Does it add value? Clearly. Would it lower the
tariff, increasing wellhead value and increasing the
state's royalty value? Yes. But in and of itself, it
will not - it cannot - make the project. What it does
do is let the rest of the country know that the
elected representatives of this state ... are willing
to do what they can to try to develop a project. This
is one of a series of issues that we need to address
in order to improve the project economics.
As to the uncertainty of the economics, that's where
the stranded gas Act ... process provides an
opportunity to develop a fiscal system which equitably
shares the risks and rewards.
We support the revival of the stranded gas Act
process, and the declaration of support implied by the
property tax abatement in this bill, and urge you to
pass it.
CO-CHAIR MASEK asked whether there were questions and then
thanked Mr. Marushack for his testimony.
Number 1251
RHONDA BOYLES, Mayor, Fairbanks North Star Borough, testified
via teleconference, noting that she represents 82,000 people in
the borough and is a business owner in the Interior "with a
substantially large investment." She said passage of HB 519
will expedite building a gas line, which is "drastically needed
in the Interior" for not only an alternative energy source, but
for the possible benefits as well.
MS. BOYLES told members that for investment in a large project
like this, where there are partners involved, it isn't
unreasonable to request clarity and certainty. "That's really
what this is all about," she remarked. Ms. Boyles said there
also must be a certain level of trust among the partners - in
this case, municipalities, the state and federal governments,
the producers, and the gas line builders. She conveyed concern
that political agendas or "pride of authorship" of certain
legislation might stand in the way of expediting this project.
She asked that legislators make decisions that are "good for all
of us."
Number 1129
MS. BOYLES offered that this isn't about losing property taxes,
but about providing economic development incentives. She said
15 mills would be the average charged in the borough, but 15
mills of zero is still zero. Without a gas line, there wouldn't
be those property taxes being collected, nor would there be an
ability to negotiate, whether now or later. She emphasized the
desire to provide an environment that is conducive to economic
development and diversification.
MS. BOYLES brought attention to possible socioeconomic impacts.
She said she didn't believe impacts would be as "emphatic" as
during construction of the oil pipeline "because we're much more
sophisticated now." She offered that the Alaska Stranded Gas
Development Act "does provide for us to ask for some relief in
the event we need it, through the commissioner of the Department
of Revenue."
Number 1012
MS. BOYLES emphasized that the long-term financial structure of
this gas line must be done better than it was for the TAPS
[Trans-Alaska Pipeline System] line. The TAPS structure pitted
municipalities, the state, and the producers against one another
in determining "the assessed value of that asset going through
our boroughs." She added, "That's an annual exercise, and it's
been fairly traumatic in the last six to seven years." She
concluded:
We want a seat at the table. If I'm asked to give up
property taxes, I will do that - that's an investment.
But what I'd like in return is a definite seat at the
table, to have some kind of input on the long-term
financial impact that a natural gas [line] will have
relative to the property tax issue.
MS. BOYLES closed by encouraging the building of a gas line and
specifying that she supports HB 519.
Number 0916
CO-CHAIR SCALZI alluded to paragraph (15) on page 4, line 8, of
Version O. He noted that the intent language, rather than the
heart of the bill itself, is where it says "including
accommodating the interests of affected municipalities." He
then referred to page 5 [lines 7-9], which read in part:
(7) an interest in taxable property that is part of anAlaska North Slope natural gas project, whether ornot, under AS 43.82, the project has been determinedby the commissioner of revenue to meet therequirements of AS 43.82.100
CO-CHAIR SCALZI said AS 43.82 is "a qualification of a project."
He then remarked, "I guess that's where, as a municipal
official, I would be a little concerned over whether or not you
had a negotiating stature, at that point. But it didn't sound
like, from your testimony, that you were too worried about
that." He asked whether that was correct.
MS. BOYLES responded:
The real point here is that ... we don't have a
negotiation point right now, sir, with all due
respect. We don't have a gas line, and I don't think
we're going to have unless we all give something - the
federal government, the state, the North Slope
Borough, and the Fairbanks North Star Borough.
CO-CHAIR MASEK thanked Ms. Boyles.
Number 0737
KEN KONRAD, Senior Vice President, BP Exploration (Alaska) Inc.,
testified via teleconference in support of HB 519, noting that
he is Vice President of Gas for his company. He told members:
Creating a supportive government framework is an
essential ingredient towards developing a successful
ANS [Alaska North Slope] gas project. An
international project of this magnitude brings many
inherent risks, which several of the prior folks have
alluded to. Governments, working constructively with
industry, can play a major role in reducing these
risks by setting clear and predictable rules under
which a project would be undertaken.
BP has previously laid out key government actions that
would facilitate future investment on this massive
undertaking - specifically, a clear and efficient U.S.
federal regulatory process, and indeed, progress is
being made with Alaska gas provisions currently part
of this pending U.S. Senate energy bill; an efficient
and predictable Canadian/First Nations regulatory
process - and BP here remains very active working in
Canada to establish such a process, and progress there
is being made also; and [a] simple, clear, and
predictable fiscal framework in Alaska such that the
massive, long-payout investments being contemplated
can be undertaken with the knowledge that the rules
won't change later.
Number 0591
MR. KONRAD continued:
House Bill 519 would be a positive step toward
achieving the necessary fiscal framework in Alaska.
The bill is modeled after House Bill 393, which was
passed in 1998. As we did in 1998, BP continues to
support the content and approach inherent in the
stranded gas Act, which this legislation refreshes,
updates, and makes available for a gas pipeline
project.
Specifically, House Bill 519 and the reenactment of
the stranded gas Act would, first and foremost,
demonstrate leadership and intent by this legislature
to provide stable fiscal terms that encourage
development of ANS gas while fully and fairly
compensating the people of the state. It would also
establish a protocol, beginning with a formal
application and followed by a process to exchange
information between investors and the state. It would
empower the state to enter into a contract negotiation
to achieve clear and simple tax and royalty terms;
these terms would need to be subsequently approved by
both the executive branch and the legislature.
Number 0528
MR. KONRAD continued:
It would provide a process with the state and
investors while providing for municipal input. And it
would provide for contract review, approval, [and]
termination provisions, inclusive of municipal input;
legislative authorization; and judicial review. And
finally, but also importantly, it would provide for
prioritization of state agency support for a
qualifying project. In aggregate, it would set out a
thoughtful and workable framework through which
important fiscal issues could be dealt with, subject
to subsequent approval by ... the legislature.
The bill also encourages Alaska hire, training, and
purchasing. BP has been and continues to support the
use of in-state capability. However, some technical
modifications should be considered to ensure the
bill's language does not draw legal challenge.
Passage of House Bill 519 would send a positive
message to investors and provide a framework to
achieve fiscal clarity and predictability. BP is
fully supportive.
CO-CHAIR MASEK asked whether there were questions, then thanked
Mr. Konrad and called upon Mr. Marquez.
Number 0410
DAVID MARQUEZ, Attorney for VECO Corporation, testified via
teleconference in support of HB 519, noting that VECO
Corporation is an Alaskan engineering, construction, and oil and
gas service company headquartered in Anchorage. In the
interests of time, he informed members that he would not read
the written testimony he had provided to the committee. As "a
proud citizen of this state" since 1973, Mr. Marquez told
members that he hopes his three children, who were born in
Anchorage, will be able to get good jobs in their home state.
Returning attention to the bill, he offered the following
testimony:
This incentive that helps reduce construction costs -
through the grant of a temporary exemption to the
project from state property taxation and all municipal
taxes, for a period from commencement of the project's
construction through the first two years of operation
of the pipeline - is very important.
Keep in mind, it's temporary - maybe four to six or
seven years. It does not apply to any taxes currently
being collected, so present revenues will not be
affected by this bill. The amount of money saved
through the temporary tax exemption reduces the cost
of construction, plus reduces the tariff and increases
the royalty and severance tax.
When the tax "holiday" is over and a pipeline is
built, the state and local governments will have a
pipeline on which to levy taxes for many decades; a
new industry, a gas industry, will have been created;
gas for in-state use will be available; Alaskans will
be employed. If it is not built, there won't be any
of that.
I urge the committee to think about the timing
inherent in this bill. If it is passed, the temporary
tax exemption is available, but, of course, not yet in
effect. It isn't in effect until construction on our
pipeline starts. There's no exemption until there's
property to tax.
Between now and then, the state continues to get all
the taxes it currently gets. Between now and then,
we've sent a signal to Washington and the producers
that Alaska wants this pipeline and will take action.
Between now and then, the state and the producers sit
down. The state gets lots of information, under
Article 04 of the Stranded Gas Development Act, and
they negotiate about the complete fiscal regime that
will apply to the project, that will be in the best
long-term fiscal interest of the state. In the
meantime, the producers continue to work on a project,
hiring Alaskans and Alaska contractors.
Number 0123
MR. MARQUEZ continued:
There has been testimony that reflects important
agreement on certain issues about this bill. First,
... it is recognized that some incentive is necessary
for this project. Second, a property tax exemption is
the most leveraging of the available incentives.
Where there is disagreement is at what point the
incentive should be granted. There seems to be some
concern that this will be seen as a giveaway and that,
instead, the state should negotiate with the gas
owners before any incentives are given. VECO feels a
great sense of urgency and feels strongly that the
incentive should be granted now.
The Stranded Gas Development Act will protect the
long-term interest of the state and municipalities.
If action is not taken this year, the only opportunity
for a significant boost to the state economy may be
lost. If we take a year or two or three to negotiate
any incentives, the opportunity may be lost as the
producers move on to other projects. There will be
time, under the Alaska Stranded Gas Development Act,
to negotiate a total fiscal regime. But VECO believes
concrete action must be taken this year to keep the
project going, or it may be decades before the
opportunity arises again.
Finally, as Bill Allen pointed out, this is not a
"producer bill." [Not on tape because of the tape
change, but in Mr. Marquez's written testimony, is the
conclusion that this is "an Alaska bill that provides
for a short-term investment by Alaska that will pay
off in a project that could be shipping gas for a
hundred years."]
TAPE 02-35, SIDE A
Number 0001
MR. MARQUEZ addressed issues raised in previous testimony:
Yes, there are going to be tough negotiations under
the Stranded Gas Development Act. But Alaska has
always had tough negotiations between the state and
the producers, and we shouldn't fear those
negotiations. We should look upon them as an
opportunity. ...
You've heard suggestions about how the Act might be
changed, and you've also heard testimony about some
uncertainties. I would submit that, for example, the
phrase "and related facilities", if the bill were to
pass as it now stands, that could be a point of
negotiation between the state and the producers - what
is the scope of the exemption.
Also, you should note that everything is on the table
under the Stranded Gas Development Act. And you'll
notice, when you review those terms, that there are
many terms that the producers will want. I suggest
that the state - as it often has, perhaps always has -
is in a very strong negotiating position, because
there are many things the producers will want, and
there's many things that the state will be able to
bargain for.
Number 0116
MR. MARQUEZ continued addressing previous testimony:
There's been the suggestion that perhaps the exemption
should stop at the end of construction, and not go
into production. I would ask you to seriously
consider not adopting that suggestion. My point is
that Mr. Marushack has noted that this exemption, in
itself, isn't enough to make the project go. During
the first two years of operation, there still may be
construction activities, and there may be market
fluctuations as our gas enters the market. I would
urge you to keep the two years after the start of
production in the bill, because that ensures that this
is [an] incentive that is worth going after, and one
that ... can make a difference for the producers.
Number 2005
With regard to the 2005 cutoff date for the submission
of an application for a contract with the state, I
think that Mr. Thompson is right - we've had 25 years,
and we need to take action. I think the committee
just needs to understand whether ... changing that
provision would help the state in its negotiating
position or not. And I think that if there's concern
about negotiating positions, that's what you have to
think about.
Today, I've heard lots of words of caution. I would
urge you to take action. Look at the benefits to the
state, beyond taxes and royalty, to the economic
development that could happen with this bill.
CO-CHAIR MASEK thanked Mr. Marquez for his testimony.
Number 0302
REPRESENTATIVE FATE referred to Mr. Marquez's mention of the
importance of incentives. He noted that in the House Special
Committee on Oil and Gas, there was a fairly comprehensive
discussion about the producer's workgroup, which has spent close
to $125 million on developing an economic model that has not yet
been seen. He asked, "How do we really know an incentive is
necessary?"
MR. MARQUEZ replied:
You've heard the testimony of Joe Marushack today that
this incentive, in and of itself, is not enough to
make a difference; it's just one brick in the wall, if
you will.
Further, under the Alaska Stranded Gas Development
Act, Article 04, which I earlier referred to - and
those negotiations, we've been told by the producers,
will start right after this bill has been enacted -
under the provisions of Article 04, the state can get
all the information that it wants, and there are great
confidentiality provisions that will encourage the
producers to be forthright.
You have to remember that this tax exemption isn't
going to come into effect for a few years, until
construction actually starts. And during that time,
the state will have plenty of time to study data and
to propose an overall tax regime, perhaps getting
additional revenue from the total sources that are
available. And there'll be plenty of time for those
negotiations, and plenty of time to analyze the data.
I think the time is now ... to act.
Number 0497
REPRESENTATIVE GREEN noted that Mr. Marquez, Mr. Marushack, and
others had indicated the effective date is the date when the
pipeline starts [to be built]. He pointed out the definition on
page 8 [beginning on line 1], which read in part:
(2) "construction commencement date" means, forproperty subject to tax under this chapter used in theexploration for, production of, or pipelinetransportation of unrefined oil through a facility theconstruction of which was begun before April 1, 1974,
the earlier of April 1, 1974, or the date the
following occur ....
REPRESENTATIVE GREEN explained that he was concerned about wells
that might be used to reinject gas, for example, or water to
replace gas "voidage." He asked how one can be certain, reading
that language, that the state won't be embroiled in varying
interpretations of the starting date.
MR. MARQUEZ answered by referring to earlier mention [by
Representative Kott] of a change in Version O that says "to be"
constructed. He said the purpose is to capture property that
will be constructed for the pipeline, not facilities previously
constructed. He added:
My understanding of that provision that you've cited -
and you might want to check with attorney Chenoweth
[drafter of the legislation] - is to make sure that
... the oil production facilities are described and
that ... the second part of that provision goes to the
new facilities. Certainly, it is the intent that this
is about the gas pipeline, and not facilities that
were previously constructed.
Number 0644
REPRESENTATIVE GREEN inquired about other facilities
constructed afterward such as an "alternative production well"
relating to gas sales, or an injection well subject to this. He
asked, "How far asunder from the treating facilities and the gas
line would you envision this project going?"
MR. MARQUEZ responded that he believes the line should be drawn
more or less along the lines Mr. Thompson was talking about.
Clearly, he said, some facilities will be pipeline-related,
whereas others will be partially so; he suggested it "would be
the subject of a great negotiation under the Alaska Stranded Gas
Development Act, and could be one of those items that gives the
state quite a bit of leverage." He questioned the legislature's
ability to define and describe every single piece of equipment
and every facility, at this point, that might be related to the
gas pipeline.
Number 0758
REPRESENTATIVE GREEN suggested potential ambiguity could be
eliminated by ensuring the CS is clear about not starting at an
earlier date, and not utilizing facilities that either may have
been built beforehand, or would be ancillary and perhaps
construed as somehow associated [with the pipeline]. He asked
whether Mr. Marquez would have any problem with that.
MR. MARQUEZ related his belief that the bill is clear now and
that negotiations could occur under the Alaska Stranded Gas
Development Act. He suggested perhaps clarification from Mr.
Chenoweth could be sought regarding the provision Representative
Green had been discussing, however.
Number 0830
REPRESENTATIVE GREEN noted that there has been conflicting
testimony about whether the bill is a "donation" or giveaway, or
a deferment to be recouped later. He asked Mr. Marquez about
his understanding.
MR. MARQUEZ answered that he understands it to be an investment,
and neither a donation nor a giveaway. He added that for it to
be an effective investment, it must be granted. Under the
Alaska Stranded Gas Development Act, he said, there will be
opportunities, "with all the other parts of the total fiscal
regime, to ... negotiate whatever would be appropriate for the
long-term fiscal interests of the state." He added, "As ...
Commissioner Pourchot indicated, it is not out of the question
that ... any payback would be part of the negotiation. He
thinks it might be a stretch, but certainly that would be up to
the negotiators under the Alaska Stranded Gas Development Act."
Number 0938
REPRESENTATIVE GREEN referred to a bill in the Senate. He
remarked that there has to be some sort of access. He asked,
"Do you have a problem if this is amended to include access?"
MR. MARQUEZ answered:
If you look at the Alaska Stranded Gas Development
Act, you'll see that the contract terms include how
the producers are going to make gas available for in-
state use. There's a reference to expansion. If you
look at Section [43.82.]210 of the Alaska Stranded Gas
Development Act and many of the other provisions,
you'll see that those issues are all things that could
be negotiated under the Alaska Stranded Gas
Development Act. You certainly want as much leverage
as you can, I've heard some witnesses say. And,
again, that's ... a subject for negotiation under the
Alaska Stranded Gas Development Act.
Number 1041
REPRESENTATIVE GREEN replied that while he'd heard Mr. Marquez
say "in-state use," he hadn't heard him commit to access.
MR. MARQUEZ responded, "I don't know how you get in-state use
without access to the pipeline."
REPRESENTATIVE GREEN countered that he believes they are two
entirely different things. He explained, "I think in-state use
means that from the gas line, for example, at Fairbanks, there
could be a take-off for in-state use, as opposed to some other
operator leasing future leases from us and discovering gas, and
not being able to get into the gas line for sales."
Number 1095
REPRESENTATIVE FATE prefaced his remarks by saying he'd like a
response from "a producer who helped submit this legislation to
the federal government." He then offered his understanding that
in the energy bill before the U.S. Senate, amendments have been
made that not only refer to an open season, but also to
[pipeline] capacity.
REPRESENTATIVE GREEN commented that unless [the U.S. Senate] had
done something in the last few days, it doesn't address access.
CO-CHAIR MASEK asked that Mr. Marushack of Phillips Alaska,
Inc., address the issue.
Number 1154
MR. MARUSHACK said:
The federal enabling legislation had a number of
provisions in it. Some of them generally talk about
in-state use of gas and access to the gas. Those
issues are extremely, extremely complicated. And I
will be the first to admit ... those issues are quite
broad within the enabling legislation. But in my
view, it has to be that way.
We have got to sit across the table from the state and
talk about, "How much gas do you need? Where do you
need it? How do we make the long-term pipeline
commitments in order to get the whole project moved
forward? And if you want to take off gas at some
point in time in the future, that we didn't say
upfront, how do we keep everybody else whole?" These
are extremely complicated issues.
Part of the Stranded Gas Development Act, in my view,
... was we would sit across the table - and this isn't
going to take weeks, this is going to take months -
and work these issues out. But you cannot do it in a
one-week or a two-week or a two-paragraph legislative
bill, if you will. ... It's just going to be very
tough. And the bottom line on this thing is, until we
get absolute clarity on these things, Phillips isn't
going to invest $20 billion in this project.
MR. MARUSHACK added that his company wouldn't go forward until
these issues, which affect the revenue stream and profitability
of this project, are well known and committed to by both sides.
"But they won't be easy," he cautioned again.
Number 1270
REPRESENTATIVE GREEN asked Mr. Marushack for his views on access
to the pipeline.
MR. MARUSHACK answered:
There are a number of ways that access to the pipeline
will be committed to. First of all, in an open
season, there is language within the enabling
legislation that ... FERC [Federal Energy Regulatory
Commission] will have 120 days from the promulgation
of the bill in order to set the rules for the initial
open season. And everybody - the state, the
producers, other producers, explorers - will weigh in
on that discussion. ...
If you're not ready to have access at that point in
time, we are committing -- our base-case pipeline is
4.5/4.3 bcf [billion cubic feet] a day. If you just
take that over a 20-year period, you're talking more
gas than we have. So ... even under the base case,
there's the opportunity; our base case assumes
exploration will be in there. Exploration means
people ... who have commitments ... to deliver gas but
don't have gas - they'll be making deals, just like in
the Lower 48. ...
There's actually two final legs. There is expansion
built into this pipeline project. ... We will have the
"Ts" and the valves in place. The compressors will
not be in place for expansion. ... But there is a
mechanism within the enabling legislation that a
producer can go to FERC and say, "I have this gas."
FERC looks at that. If the producers don't want to do
it on their own - I should say, if the pipeline
companies, on their own, don't want to expand that
pipeline - FERC, per the enabling legislation, can
force that pipeline to be expanded. Again, these are
complicated issues, though.
Number 1367
REPRESENTATIVE GREEN asked whether, in the views of Mr.
Marushack or Mr. Marquez, there is access beyond a very near-
term open season - in 2005 or 2006, for example - that would
allow companies to explore for gas and then, in essence, use the
pipeline before the time when the producers no longer have gas
to fill it, ten or fifteen years later. He asked, "Do you
envision that this, in any way, is going to adversely affect
competitors from ultimately getting in the line, say, in the
next decade?"
MR. MARUSHACK replied:
Phillips is the largest exploration company up here.
We are putting more money into exploring for gas, I
believe, than anybody. ... Not only am I planning on
making sure we have access to the pipeline, but I'm
banking on it, that we will. So, no, I do not have
any fear that we will have problems getting our gas
into the pipeline one way or another. Will [there] be
a one-, two-, three-, four-, five-year delay? There
could be. It has to be economic expansion; you're
right. And I'm willing to take that risk, and my
company's willing to take that risk, and ... our
partners - we have very few 100 percent leases; most
of ours are with other companies. ...
Phillips has never required anything in the enabling
legislation that guaranteed access. But in spite of
that, ... we were part of the team that allowed that
access language to be - expansion language - to be
[in] the enabling legislation. So, ... personally,
Representative Green, I'm not concerned.
Number 1578
CO-CHAIR MASEK announced that to her belief, everyone who had
signed up had testified. She closed public testimony and
invited Representative Kott to offer comments and address
Representative Green's concerns regarding access.
Number 1609
REPRESENTATIVE KOTT acknowledged this is a learning experience
for him. He offered that the terms tax "exemption" or "holiday"
can be used interchangeably; at the end of the day, it will be
the department's responsibility to come to the table with the
producers and negotiate to ensure certainty and clarity in the
economics of the project. Furthermore, there is no viable
project right now to tax, so nothing is lost. He noted that
perhaps there will be short-term losses in return for extremely
long-term benefits.
REPRESENTATIVE KOTT suggested this may bring [the state] perhaps
$250 million to $300 million a year in revenue, multiplied by 50
years to 100 years - as much as $30 billion. In the worst case,
by contrast, he'd heard three-quarters of a billion dollars
lost, he said, multiplied by seven years. In addition to
monetary benefits, he proposed looking at the ancillary benefits
of putting Alaskans to work, beefing up the economy, and
providing diversification. "That's what it's all about," he
added. He referred to federal legislation and called this one
component of a three-legged stool. He told members he believes
HB 519 does what it is supposed to do, to open up the
opportunity and send a message to Washington, D.C., that the
state is a stakeholder, so that Congress goes forward with its
own incentive package.
Number 1822
REPRESENTATIVE KOTT noted that there'd been discussion about
whether having [an exemption] for two extra years after
production begins would jeopardize the incentive package itself.
He remarked, "I can't tell you. But I also have become aware
that even when there's gas flowing through the pipe, there's
still additional construction costs. It doesn't just end right
there. So maybe a couple of years is most viable to make an
economic project ... that can go forward."
REPRESENTATIVE KOTT referred to discussion about changing the
date for sunsetting the Alaska Stranded Gas Development Act and
said, "That's fine. The reason why we went to this particular
date is that in the original bill, it was three years. So, we
just took this and ... made it three years." Based on testimony
from some of the producers, he pointed out that it might require
a minimum of a year of negotiating terms back and forth; he said
he probably wouldn't favor "rolling this back" to 2003 or 2004.
Noting that it has been 25 years, he concluded, "I'd like to see
something get off the ground. Certainly, I think all of us
would like to see that."
Number 1937
REPRESENTATIVE GREEN referred to his previous experience in the
oil and gas industry. He pointed out that the bottom line for a
company is the stockholders. Likewise, he said, he feels a
commitment to the people of Alaska. Noting the pressure to move
this legislation quickly, he reminded members that the producers
still haven't provided economic data requested at the beginning
of the year. He expressed concern that they are starting to
indicate they'll produce the economic data only after this
[bill] is signed.
REPRESENTATIVE GREEN related that he'd worked for Mr. Thompson
and has the utmost respect for him. Representative Green
pointed out that Mr. Thompson had urged the committee to take a
thorough look at this. Representative Green said he felt
rushed, unfairly so, because a number of months have gone by
during which this bill could have been considered, rather than
trying to rush it through right at the end.
REPRESENTATIVE GREEN told members he would have to vote "no" on
passing this out of committee until he could review the
materials added in the last couple of hours. He explained:
That's not the way you do legislation that affects us
for fifty or a hundred years, as we've heard. ...
We're worried about a few days for a hundred-year
process that's going to affect this state, the biggest
thing since the TAPS line? Come on. ...
I'll be glad to spend nights looking through this
thing and trying to make sense out of this and the
other things that are happening through the
legislature. But I am certainly not ready to sign
this thing off and send it off to a committee that has
had none of this. ... This is going to go to a finance
committee that is either going to have to reinvent the
wheel or hear this all again and say, "Now, you guys
have the onus of making that decision in a few hours."
That's not right.
REPRESENTATIVE GREEN concluded by saying the current committee
should be looking at it; it's a resource issue. He pointed out
that Alaska's own state agencies have cautioned that some
aspects of the bill aren't a good idea.
Number 2142
CO-CHAIR MASEK asked whether perhaps Representative Green's
concerns were because of the Senate bill he'd mentioned.
REPRESENTATIVE GREEN answered that he hasn't been involved with
that Senate bill, although he has read it. However, he has been
involved with the Joint Committee on Natural Gas Pipelines,
which has been involved on the federal and state levels, and he
has talked with Alaska's congressional delegation and
legislators from other states. He pointed out that there is a
direct issue with access in the Senate bill. He said:
I would like to see that here. I would like to see a
bill that goes out of this legislature with that
component. Now, it doesn't have to say, "We're going
to provide access." But access needs to be spelled
out. I would hate to go into a negotiation period
with it excluded from here, and saying, "That wasn't
part of the deal; our negotiations are going to be
confined to what's in here." And we refer to the
stranded gas Act as things that we would like. "Well,
that will be something for negotiation; sign this bill
and then we'll negotiate according to the stranded gas
Act."
REPRESENTATIVE GREEN clarified that he was in favor of helping
[companies] defer upfront costs, but didn't like the pressure
tactics, with issues to be negotiated after signing. He said he
wouldn't buy a car like that, or life insurance. He added, "I
always get concerned when somebody says, 'Do it now.'"
Number 2261
REPRESENTATIVE FATE said he has a different approach, although
he respects Representative Green's 37 years in the gas and oil
business; he noted that he'd begun in the same business as well.
He explained his view that in business, timing is everything.
Noting that there still are negotiations on the U.S. Senate
energy bill with regard to the tax regime, he said, "We've been
asked, by our congressional delegation, to express ourselves ...
and our interest in getting our pipeline through. And that's
what we've been doing here."
REPRESENTATIVE FATE said he also is pressured, by Alaskans who
want a pipeline, and isn't willing to gamble that a pipeline
might not be built in the near future "just because some of the
'T's aren't crossed and the 'I's aren't dotted." He said he is
also disappointed that the economic models haven't been provided
by the producers, but believes they wouldn't have gone to such
lengths at the federal level if there weren't some problems in
the economics. Speaking of the producers, he added, "They are
asking both the federal government and they're asking the State
of Alaska to provide some incentives to facilitate the
construction of this pipeline at the earliest date."
REPRESENTATIVE FATE related his view that unless the permitting
process can begin within about three years, there may not be a
pipeline. "I am not willing to take that risk," he stated. He
offered his own belief, "Simply, ... we need a pipeline, and we
need it badly." He suggested members need to decide whether the
pipeline is needed as quickly as possibly.
Number 2455
CO-CHAIR SCALZI referred to Representative Fate's comments about
expediting this, but also acknowledged the rapidity with which
this is moving. He said he'd received the original bill over
the weekend and had prepared amendments, no longer relevant to
Version O. He added, "It specifically defers taxes until a
later date certain, and then it also ... talks about the
recouping of those, and it also has intent language that says we
can defer the whole thing if we wish, but it puts it down the
road. It allows an incentive, I think, for deferral of taxes,
and I think that's what we're looking for here." He told
members:
The problem I have, as expressed by Representative
Green, is that we will be doing this, at this
particular time, sight unseen of any hard evidence
that this is justifiable. Now, it certainly may be
justifiable, but unless we have ... the data, the
numbers to do it right now, then I feel a
responsibility to the State of Alaska before I feel a
responsibility of creating this project that we are
talking about - conservative estimates, [a] $500
million deferment.
CO-CHAIR SCALZI noted [Representative Kohring's] plan that does
away with municipal assistance and revenue sharing, which
certainly will be affected by this tax break. He said although
municipalities may say they want the project to go forward, the
money for infrastructure will have to come from somewhere. He
said deferring it upfront with no "promissory note" for later
reimbursement concerns him. Co-Chair Scalzi specified that he
wasn't speaking in opposition to the bill, but wanted more time
to consider it. He said Representative Green's point about
access is a new issue to him, for example. He recommended
holding the bill over.
Number 2600
REPRESENTATIVE KOHRING thanked the committee for allowing him to
speak. He said he feels strongly about this bill, which he
believes presents a great opportunity. He concurred with
Representative Fate that there is a timing issue. He requested
that the bill be moved forward.
Number 2650
REPRESENTATIVE GREEN asked that members consider three items.
First, the committee had heard from Mr. Marushack that this
isn't a "deal killer" but is one building block. Second, U.S.
Senator Stevens had discussed the possibility of a federal
"floor." Representative Green said there is no assurance that
the gas-market price will hold at $3.00 or $3.50, which is the
economic point at which there is more exploration for gas; he
indicated, however, that one producer had turned down the idea,
although one had not. And third, there was discussion about
Russian gas and missing a window of opportunity.
REPRESENTATIVE GREEN again pointed out that an influx from a
tidewater location such as Sakhalin Island, by way of tankers,
could flood the Midwest with gas via an existing pipeline. He
cautioned that it is a huge issue that [the producers and
investors] have to worry about; he suggested if they don't fear
it in the future, they can't be afraid of it in the next week.
He urged further consideration of the ramifications, for another
week or so.
Number 2819
REPRESENTATIVE FATE responded that except for the timing, he
wouldn't object to delaying this; however, to his belief, the
delay may be the "deal killer." He referred to SB 360 and
indicated it may be moving rapidly through the Senate. He
inquired about a meeting of the House Resources Standing
Committee on Friday.
CO-CHAIR MASEK said there would be a meeting, but this bill
wouldn't be addressed.
REPRESENTATIVE FATE suggested if it came up two weeks later,
he'd consider it "dead on arrival" because of needing to go
through the Senate.
Number 2902
REPRESENTATIVE STEVENS expressed concern about the timing too.
He said he'd be comfortable having it go to the House Finance
Standing Committee.
Number 2917
REPRESENTATIVE CHENAULT agreed with Representative Fate
regarding timing. He indicated the legislature has worked for
seven years on different programs, tax schemes, and agendas.
TAPE 02-35, SIDE B
Number 2940
REPRESENTATIVE CHENAULT said it should be moved. He voiced
concern that if a pipeline isn't built, it will cost Alaska
considerably more money than "what we stand to lose here."
Number 2900
REPRESENTATIVE GREEN asked when the bill could be heard again.
CO-CHAIR MASEK stated her intention to move it from committee
that day. She agreed there are questions, but characterized it
as one more piece of a puzzle that strengthens Alaska's
stakeholder position in developing a pipeline. She said it
sends a message to Congress that the state is interested. She
agreed with the need to offer incentives, rather than doing
nothing. She offered that the bill is "pretty fair." Regarding
competition, she said it costs less to develop in other
countries, and this sends a message that "we are prepared and
ready to do business in Alaska." She acknowledged that the bill
may change along the way, but said that is up to the sponsor and
those interested in following the bill.
Number 2810
REPRESENTATIVE McGUIRE suggested those who have concerns can
work on it before it gets to the House Finance Standing
Committee. She said many people have come to her office and
talked with her about it; she said it has gone through more than
one draft, and that there has been a lot of work over several
months. She expressed confidence that any serious concerns can
be worked on.
Number 2762
REPRESENTATIVE KERTTULA informed members that Representative
Green had covered the points of concern to her. She suggested
giving some thought to the definition of "related facilities".
She added, "We set the law. We define terms. We don't leave
that for further negotiation. That could have such broad
implications if it's not defined in the statute."
REPRESENTATIVE KERTTULA said she has great respect for the
industry and wants to see this go forward, but wants it to
happen in a way that will "help us all." She added, "I know
that there's a commitment to that, so I'm hoping that we will
take advantage, to try to make the changes that can make that
happen, because if we don't, I think we could all end up
suffering. So I can't support it. I understand the intentions.
And I hope that we make some changes."
Number 2708
REPRESENTATIVE McGUIRE moved to report CSHB 519, version 22-
LS1651\O, Chenoweth, 4/22/02, out of committee with individual
recommendations and attached "zero" fiscal notes.
Number 2701
REPRESENTATIVE GREEN objected.
A roll call vote was taken. Representatives McGuire, Stevens,
Fate, Chenault, and Masek voted to move CSHB 519 out of
committee. Representatives Green, Kapsner, Kerttula, and Scalzi
voted against it. Therefore, CSHB 519(RES) was moved out of the
House Resources Standing Committee by a vote of 5-4.
REPRESENTATIVE KAPSNER specified she was voting "no" in
deference to Representative Green's concerns.
CO-CHAIR MASEK announced that the meeting was adjourned.
[End of this tape.]
TAPE 02-36, SIDE A
Number 0001
CO-CHAIR MASEK brought the meeting back to order within a minute
or so.
REPRESENTATIVE McGUIRE moved to rescind the committee's action
in moving CSHB 519(RES) out of committee with attached "zero"
fiscal notes. There being no objection, Version O was back
before the committee.
Number 0056
REPRESENTATIVE McGUIRE moved to report CSHB 519 [version 22-
LS1651\O, Chenoweth, 4/22/02] out of committee with individual
recommendations and the attached fiscal notes.
Number 0073
REPRESENTATIVE GREEN objected.
A roll call vote was taken. Representatives McGuire, Stevens,
Fate, Chenault, and Masek voted to move CSHB 519 out of
committee. Representatives Green, Kapsner, Kerttula, and Scalzi
voted against it. Therefore, CSHB 519(RES) was moved out of the
House Resources Standing Committee by a vote of 5-4.